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March 26, 2024

Investing in Private Placements with a Self-Directed IRA

Key Points 

  • Self-Directed IRAs allow you to invest in private placements.
  • Private placements offer potential for high returns and diversification of your retirement portfolio.
  • With Broad Financial, you can set up a Self-Directed Roth IRA with checkbook control and invest in private placements in real time.
A group of investors who are investing in private placements, gather around graphs and observe its trends.

There are so many more investment opportunities out there than what you see on Wall Street. With a Self-Directed IRA (SDIRA), you can tap into the expansive landscape of alternative investments, including private placements. Some of the most innovative and exciting companies fund their growth with private placements. A Self-Directed IRA enables you to invest in private placements with the added bonus of tax advantages. You can gain control of your retirement investing by placing greater stock in your business instincts.

What are Private Placements?

Private placements enable individuals to have the opportunity to invest in privately-held companies beyond the public market. These offerings are typically open to a select group of investors. Private placements can take many forms, including:

A block of arrows increase as it moves down the line, indicating that by investing in private placements with a Self-Directed IRA, you can potentially oversee steady returns.
  • Limited Liability Companies (LLCs): Business structures in the U.S. that combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
  • Limited Partnerships (LPs): Businesses that involve at least one general partner (who has unlimited liability) and one or more limited partners (who have liability limited to the extent of their investment), often used in real estate and investment ventures.
  • Hedge Funds: Private investment funds that employ diverse strategies to invest in a wide array of assets.
  • Startups: Early-stage companies with a unique business model or product, often seeking private investment to fuel growth and scalability. 
  • Small Businesses: Independently owned and operated companies seeking private investment for growth or operational needs.
  • Crowdfunding Opportunities: Fundraising platforms that allow businesses or individuals to raise small amounts of money from a large number of people.
  • Equity Securities: Ownership stakes in a company, often in the form of stock.
  • Debt Securities: Loans made to companies or organizations, with terms for repayment and interest rates.
  • Convertible Notes: Debt securities that can be converted into equity at a later date.
  • Preferred Stock: Stock with a higher priority over common stock in the event of liquidation.

Who's Eligible to Invest?

A group of SDIRA investors meet with investment sponsors, as they shake hands and come to an agreement on investing in private placements.

Private placements are typically offered to accredited investors, a term for individuals or institutions with high net worth or income. Options exist for non-accredited investors, but those options often have certain restrictions. Even so, exploring the possibilities for private placements can broaden your retirement horizons. Crowdfunding platforms, for example, allow non-accredited investors to invest in private placements.

Why Invest in Private Placements with a Self-Directed IRA?

Private placements may possibly offer better returns than Wall Street products because you can potentially jump in during a company's early days and set yourself up for gains if the company grows. Plus, private placements generally aren't as vulnerable to market volatility since they're not publicly traded.

Why use a Self-Directed IRA instead of investing with personal funds? Liquidity, for one. Many companies impose a waiting period before investors can cash out. The extended wait more closely aligns with the essence of retirement savings as opposed to the transactional nature of cash. Plus, the tax advantages of an SDIRA let you grow any gains tax-free or tax-deferred.

Another benefit of investing in private placements with an SDIRA? Diversification. An SDIRA allows you to spread your retirement savings across multiple asset classes, including real estate, cryptocurrency, and, as we’ve discussed, private placements.

A man piles coins in his savings jars with plants growing outside of them, showcasing with patience and due diligence, growth in your retirement savings can occur.

Due Diligence

Because they are not publicly traded, private placements do not have to adhere to the same regulations and disclosure requirements as public offerings. Therefore, it’s important to conduct due diligence before investing. Here are a few questions to ask before placing an investment in a placement:

  • Is the company well-run?
  • Do I believe in the leadership team?
  • How much capital does the business need to grow or scale?
  • What are the company's growth prospects and exit strategy? How long will it take to potentially see a return on my investment?
  • What is the company's track record and how do the financials look? 
  • Has the company previously raised funds. If so, how did those investments fare?

Moving Forward with a Private Placement Investment

A relaxed couple pushes a bike across a field as they enjoy the leisurely days of retirement.

Investing in private placements through a Self-Directed IRA is easier than you might think. Here's how you can get started:

  1. Identify and Research Opportunities: It’s advised to conduct due diligence on companies you're interested in investing in.
  2. Choose a Self-Directed IRA Custodian: Once you choose your preferred SDIRA custodian, you can open a Self-Directed IRA. Your custodian can help you understand the nuances of investing through a Self-Directed IRA.
  3. Fund Your Account: You can roll over or transfer funds from an existing 401(k) or IRA into your new SDIRA. You can also make a contribution to fund your new account.
  4. Complete the Investment: When you're ready to invest, you'll send your custodian an Investment Authorization Form and any other additional paperwork. If you have a Self-Directed IRA with checkbook control, also called a Checkbook IRA, you can simply write a check or send a wire from your IRA’s dedicated checking account. For more information about the checkbook control setup process, visit our Checkbook IRA page.
  5. Monitor and Manage Your Investment: It’s important to keep track of your investments and monitor their performance regularly. That will help you stay updated on any pertinent changes or developments within a company in which you invest.

Investing in Private Placements with a Broad Financial Checkbook IRA

If you're ready to gain control of your retirement savings and explore the potential of private placements, Broad Financial, along with our sister company and in-house SDIRA custodian, Madison Trust, can help you get set up. We specialize in Checkbook IRAs that allow you to conduct your everyday private placement investment transactions in real time. Contact us to learn more today!

By upgrading your Self-Directed IRA to a Checkbook IRA LLC, you can make investments in real time, whether you're investing in crypto or investing in private placements.

Disclaimer: Broad Financial LLC does not provide legal, tax, or investment advice. Please consult with your tax or legal advisor before making investment decisions. 

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